Pound's Muted Reaction to Growth Data Shows Brexit's Dominance

  • Sterling reached two-month high versus dollar on Tuesday
  • U.K. growth slowed in first quarter, in line with forecasts

The pound halted a three-day gain versus the dollar as data showed that U.K. economic growth slowed in the first quarter, further evidence that the currency’s direction is being driven by investors’ view on the nation’s June referendum on its membership of the European Union.

Sterling climbed to the highest level versus the U.S. currency since February on Tuesday amid signs the “remain” camp was pulling ahead in the campaign over Britain’s membership of the EU. While the referendum is still about two months away, it has dominated the pound’s direction since the start of the year, acting as barometer of sentiment throughout the debate. While the pound fell late in the London trading day, it remained little changed in the aftermath of the growth-data release.

“U.K. growth conditions have not been the key driver of the currency this year,” said Manuel Oliveri, a foreign-exchange strategist at Credit Agricole SA’s corporate and investment-banking unit in London. “Everything has been about Brexit fears.”

The pound fell 0.3 percent to $1.4540 as of 4:11 p.m. London time, having gained 1.8 percent in the previous three days. It climbed to $1.4639 Tuesday, the highest since Feb. 4. Sterling weakened for the first time in nine days versus the euro, slipping 0.5 percent to 77.85 pence.

Weak Growth

Growth slowed to 0.4 percent from 0.6 percent in the final three months of 2015, as forecast in a Bloomberg survey of economists. The estimate, published by the Office for National Statistics, matched the weakest pace since the end of 2012.

A phone poll on the referendum published Wednesday indicated that 45 percent of Britons would vote to remain in the EU, with 38 percent voting to leave.

“Sterling has been a bit volatile, and we believe the currency should become more volatile” due to concerns over Brexit and speculative short positioning, which is “quite elevated,” Oliveri said. A short position is a bet an asset’s price will decline.

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